Will a Drop in the Base Rate Mean Good News for Borrowers?

by : Reno Charlton

In recent reports the governor of the Bank of England, along with a range of industry professionals, has indicated that the next base rate cut could come as soon as next week, and not in May as many had originally predicted. Mervyn King, the governor of the central bank, has indicated that tight credit conditions in the UK along with the need to boost the economy are likely to result in the next base rate cut coming sooner rather than later.

However, whilst homeowners and borrowers may be looking forward to the rate cut in the hope that it will bring some form of financial relief, this will not necessarily be the case. In fact, in a recent report Mr King acknowledged that whilst the Bank of England was doing what it could to help those struggling with high interest rates by cutting the base rate the benefits of this were being offset by the fact that lenders were continuing to hike up their interest rates despite the base rate cuts.

With the country facing severe financial crisis as a result of the global credit crunch, and with lenders finding it more and more difficult to get finance on the wholesale money markets to fund their lending, many have had to try and increase profits whilst cutting risks by taking action such as hiking up interest rates.

Some lenders, such as the Nationwide, which recently hiked up mortgage rates for the fifth time since the beginning of this year, have admitted that one of the reasons for doing this is to try and close the doors on new lending.

So, whilst borrowers may be breathing a sigh of relief over the impending base rate cut it will not be good news for all borrowers. There is no guarantee that lenders will apply all or any of the base rate cut to their mortgages and loans, and in some cases - as they are now - lenders may continue to raise interest rates as the credit crunch continues to bite.

Of course, consumers that see their rates stay static on mortgage and loans, or even see rates rise, despite the base rate cut can shop around for another one, but should bear in mind the tighter credit conditions that are in place.